One of the most important considerations for employers as they prepare to transition to a defined contribution health plan is the design of the underlying Health Reimbursement Arrangement (HRA). Here is a guide with answers to some frequently asked questions (FAQs) on HRAs. 
What is a Health Reimbursement Arrangement?
A Health Reimbursement Arrangement is an IRS-approved, employer-funded, tax-advantaged plan that reimburses employees for out of pocket medical expenses, including individual health insurance premiums.
Health Reimbursement Arrangements (HRAs) are one of several programs authorized by the Internal Revenue Service (IRS) that give individuals tax advantages to offset health care costs. Other IRS programs include Health Savings Accounts (HSAs) and Flexible Spending Arrangements (FSAs). For more information see: Health Reimbursement (HRA) - What is it?
What is the difference between a Health Reimbursement Arrangement and an HSA or FSA?
An HRA, HSA and FSA are all IRS-approved plans where distributions are used to pay for qualified medical expenses on a pre-tax basis. However, there are some key differences:
-
HRA: An HRA is a notional account funded solely by the employer. Employees may not contribute. Contributions are not included in employees' income. Employers pay only after their employees incur eligible medical expenses. An HRA is the only IRS-approved plan that allows an employer to reimburse for individual health insurance policies.
-
HSA: An HSA is a financial account and can be funded by the employer and/or the employee, as well as any other person (such as a family member). Contributions, other than employer contributions, are deductible on the eligible individual’s tax return whether or not the individual itemizes deductions. Employer contributions are not included in income.
-
FSA: An FSA can be funded by the employer and/or the employee, though usually it is funded primarily by the employee.
Why would an employer offer a Health Reimbursement Arrangement?
An HRA allows companies to offer flexible benefits, providing an alternative for companies who cannot offer group health insurance due to high cost or participation requirements. HRAs offer certain advantages for employers:
-
HRA funds are controlled and retained by the employer upon termination of the employee. There are no minimum or maximum HRA contribution amounts, and no minimum HRA participation requirements.
-
HRA funds can accumulate from year to year, offering a retention incentive.
-
HRAs offer flexibility in health benefit plan design. Employers determine how they want to use the HRA, either as the entire health benefit for the company, or as a supplement to a group health plan.
How many Health Reimbursement Arrangements have been established?
While the total number of HRAs is not available as a single number, according to the IRS the total number of HRAs and HSAs combined in 2010 was 5.7 million, up from 1.2 million in 2006. Assets in HRAs and HSAs in 2010 were $7.7 billion, up from $835.4 million in 2006.
What are the advantages of an HRA?
HRAs give employers and individuals more control over medical expenses. For example:
-
HRA funds are used only for IRS-qualified health insurance premiums and medical expenses and encourages consumer-directed health care spending.
-
HRAs do not require either the employer or the individual to set up a separate bank account. Reimbursements are issued directly to the employee.
-
HRA reimbursements are tax-deductible for the employer and tax-free for the employee.
-
HRAs allow employers to control and predict the maximum expense related to health care benefits for their employees.
-
A majority of employers allow HRA rollover, which lets employees accrue (save) their HRA balance from year to year, contributing to employee retention.
-
Individuals can use auto-reimbursement of premiums to simplify management of their HRA funds.
How do HRAs work?
Employers choose the amount of HRA allowances to provide to employees (monthly or annual allowances). These funds are notional, and available to reimburse individuals for health care expenses including health insurance premiums. Individuals can be reimbursed with HRA funds for premiums with any insurance plan, as well as other qualified medical expenses.
What are critical underwriting or participation requirements?
With an HRA, there is no underwriting and no participation requirements. HRA Administration fees are typically based on the size of the company and plan participation.
The HRA plan must meet basic IRC Section 105 non-discrimination requirements to obtain favorable tax treatment. Benefits may be tiered according to single vs. family coverage, or based on bona-fide job criteria such as years of service, location, job description, or employee status (active vs. retired).
What do employers need to think about when setting up an HRA?
A good HRA Administrator gives employers a great deal of flexibility in determining HRA design. Employers have control and choice over:
-
Eligibility requirements
-
Plan Design (contribution levels, reimbursable expenses, rollover/accumulation options)
-
Reimbursement schedule
-
Reimbursement methods
How much do HRAs cost and what are typical funding levels?
The cost of an HRA is entirely set by the employer. Important factors include:
-
The amount of employees' HRA allowances
-
How much of the allowance (if any) will be rolled over year-to-year
HRA funding levels vary widely, with typical amounts falling between $1,000 and $2,000 per employee per year. But again, there is no minimum or maximum amount.
Is rollover of unused HRA funds required?
No. Employers determine whether or not employees' unused HRA balance carries over from year to year. Rollover amounts may be unlimited, capped at pre-determined annual amount, or set at no-rollover.
Are there minimum and maximum amounts of funding for HRA plans?
Currently there are no annual minimum or maximum limits on HRA plan funding.
What medical expenses can HRA funds be used for?
IRC Section 213(d) sets which medical expenses are reimbursable through an HRA. Within this list, employers can restrict categories of expenses. Most employers allow all qualified 213(d) expenses to be eligible for reimbursement, including but not limited to the following:
-
Individual health insurance premiums
-
Hospital services
-
Doctor visits
-
Prescriptions
-
Psychologist/Mental health
-
Chiropractic Services
-
Acupuncture
-
Eye exams
-
Dental
For a complete list see: HRA Eligible Medical and Insurance Expenses.
Can employees have an HRA and an HSA or FSA?
Yes. All three programs can exist alongside one another, but employers must be careful about how they work together. For example, with both an HSA and FSA there are special ordering ("coordination") rules to consider. For further explanation see:
